Thursday, June 9, 2011

Potential of offshore crude oil and natural gas resources for U.S.

The 2010 Macondo oil well accident in the Gulf of Mexico heightened awareness of the risks associated with exploration and development of offshore crude oil and natural gas resources, particularly in deep water. In addition, there is significant uncertainty about the offshore resources available in the Gulf of Mexico and Alaska offshore areas. Despite the risks and uncertainties, however, offshore crude oil and natural gas production is expected to remain an important component of U.S. supply through 2035.

In 2009, offshore production accounted for 1.79 million barrels per day or 33 percent of the 5.36 million barrels per day of total U.S. crude oil production and 2.70 trillion cubic feet or 13 percent of the 20.96 trillion cubic feet of U.S. natural gas production. In the AEO2011 Reference case, offshore production accounts for roughly 32 percent of total domestic crude oil production and 11 percent of total domestic natural gas production over next 25 years.

Analysis cases

Three sensitivity cases were used to evaluate the impacts of key assumptions related to the availability of offshore crude oil and natural gas resources and the costs of exploring and developing them. Specific assumptions in the three cases are discussed below.

High OCS Resource case Resource estimates for most of the U.S. outer continental shelf (OCS) are uncertain, particularly for resources in undeveloped regions where there has been little or no exploration and development activity, and modern seismic survey data are lacking. In several recent studies prepared for the DOE [56] and the National Association of Regulatory Utility Commissioners [57], technically recoverable resources in undeveloped areas of the OCS have been estimated at 2 to 5 times the latest (2006) estimates from the U.S. Department of the Interior’s Bureau of Ocean Energy Management.

The AEO2011 High OCS Resource case assumes a technically recoverable undiscovered crude oil resource base in the Atlantic, Pacific, and Alaska OCS and in areas of the eastern and central Gulf of Mexico (which are currently under a statutory drilling moratorium) that is triple the size of the resource base assumed in the Reference case (Table 6), resulting in a total OCS level of technically recoverable resources of 144.0 billion barrels of crude oil, as compared with 69.3 billion barrels in the Reference case. For natural gas, the High OCS Resource case triples the technically recoverable undiscovered resources in some areas, with the exception of the Alaska OCS. Projected natural gas production from the Alaska OCS is not sensitive to the level of technically undiscovered resources, because natural gas prices are not high enough to support investment in a pipeline to bring natural gas from the North Slope area to market.

Reduced OCS Access caseThe Reduced OCS Access case assumes leases in the Pacific, Atlantic, Eastern Gulf of Mexico, and Alaska OCS regions are not available until after 2035, as detailed in Table 7.

High OCS Cost case
The High OCS Cost case assumes that costs for exploration and development of offshore oil and natural gas resources are 30 percent higher than those in the Reference case. The higher cost assumption is not intended to be an estimate of the impact of any new regulatory or safety requirements, but is simply used to illustrate the potential impacts of higher costs on the production of OCS crude oil and natural gas resources.

Analysis results

In the High OCS Resource case, the assumed increase in technically recoverable OCS resources in undeveloped areas impacts crude oil and natural gas production through 2035, primarily because of the long lead times required for resource development in the offshore, regardless of the size of the resources discovered. In most areas, depending on location and water depth, a period of 3 to 10 years for exploration, infrastructure development, and developmental drilling is required from lease acquisition to first production. Because the assumed availability of leases in the Pacific, Atlantic, Eastern Gulf of Mexico, and Alaska is the same in the Reference and High OCS Resource cases, crude oil and natural gas production is not affected by the high resource assumption until 2025 and after.

In 2035, offshore crude oil production in the High OCS Resource case is 51 percent higher, at 3.25 million barrels per day, than the Reference case production level of 2.15 million barrels per day (Figure 30). The majority of the increase (65 percent) is from the Alaska OCS, based on the assumed discovery and development of a large field with 2 billion barrels of recoverable crude oil resources. As a result, total domestic crude oil production in 2035 is 1.05 million barrels per day (18 percent) higher in the High OCS Resource case than in the Reference case. Cumulative total domestic crude oil production from 2010 to 2035 in the High OCS Resource case is only 5 percent higher than in the Reference case.

Changes in domestic oil production tend to have only a modest impact on crude oil and petroleum product prices, because any change in domestic oil production is diluted in the world oil market. In 2009, the United States produced 5.36 million barrels per day of crude oil and lease condensate, or 7 percent of the world total of 72.26 million barrels per day. Unlike crude oil supply and prices, domestic natural gas supply and prices are determined largely by supply and demand for natural gas in the North American market, where the development and production of shale gas in the Lower 48 States is largely responsible for current and foreseeable future market conditions.

Natural gas production in U.S. offshore areas in 2035 is 0.7 trillion cubic feet higher in the High OCS Resource case than in the Reference case, putting some downward pressure on natural gas prices (Figure 31). In 2035, the Henry Hub spot price is about 3 percent lower in the High OCS Resource case than in the Reference case. However, the lower price results in only a small increase in natural gas consumption, 0.2 trillion cubic feet. Thus, the increase in OCS natural gas production is offset by a decrease of 0.5 trillion cubic feet in production from onshore domestic supply sources.

In the Reduced OCS Access case, removing the Pacific, Atlantic, Eastern Gulf of Mexico, and Alaska OCS from future leasing consideration lowers projected domestic production of both crude oil and natural gas. The impact on domestic crude oil production starts after 2026 as a result of the lead time between leasing and production and the economics of projects in undeveloped areas. In 2035, offshore crude oil production in the Reduced OCS Access case, at 1.78 million barrels per day, is 17 percent or 0.17 million barrels per day lower than in the Reference case, resulting in a 6 percent decrease in total domestic crude oil production.

Offshore natural gas production in 2035 is 5 percent lower in the Reduced OCS Access case than in the Reference case (2.92 trillion cubic feet compared with 3.05 trillion cubic feet), resulting in a decrease in total U.S. natural gas production of less than 1 percent. Cumulatively, total domestic crude oil and natural gas production from 2010 to 2035 is less than 1 percent lower in the Reduced OCS Access case than in the Reference case.

In the High OCS Cost case, exploration and development costs for crude oil and natural gas resources in all U.S. offshore regions are 30 percent higher than in the Reference case, resulting in lower levels of offshore crude oil and natural gas production throughout the projection period. The largest difference in production levels between the two cases occurs in 2015, when total U.S. offshore crude oil production is 112,000 barrels per day (6 percent) lower and offshore natural gas production is 0.2 trillion cubic feet (9 percent) lower than in the Reference case.

The higher exploration and production costs in the High OCS cost case change the economics of oil and gas development projects and reduce the number of wells drilled annually in offshore areas. Because of the higher costs, exploration and development of some offshore resources occur later, when prices are higher. In 2035, lower 48 offshore crude oil production is 2 percent lower, and lower 48 offshore natural gas production is 3 percent lower, in the High OCS Cost case than in the Reference case. Impacts on crude oil and natural gas prices and consumption are small. In Alaska, however, the increase in costs deters the development of additional offshore resources that are economically viable in the Reference case.